Comparative review of profitability in BIDV and Vi- 123docz.net

Comparing with Vietinbank, a bank having 26.74% ROE in 2011, it is easy to point out how much effective Vietinbank has been in generating profitability.

Despite capturing a higher profitability than BIDV in 2011, the following period saw quite poor performance in Vietinbank with ROE dropped to as low as 10% since 2015.

Figure 2.4 – Comparison of BIDV and Vietinbank profitability

(Source: BIDV and Vietinbank annual report)

While the aforementioned quantitative analysis helps revealing the most important variables to Vietnam commercial banks to consider when attempting to maximize profitability. This section will provide an insight into the profit making operation of BIDV over the period to examine the efficiency of profit making in BIDV. For practical implications, the comparison with Vietinbank will be made where relevant to judge the efficiency of financial performance conducted by BIDV. A quick glance at the figure show that profit of Vietinbank and BIDV tended to oppose to each

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Comparison of Vietinbankv.s BIDV profitability

BIDV ROA Vietinbank ROA BIDV ROE Vietinbank ROE

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other, though the pattern of change in certain periods could somewhat resembled each other. Over a course of 15 years, it was seen that BIDV outran Vietinbank in most of the time, except before 2007 and after 2013. In particular, the period from 2007 to 2013 marked the sustainable growth of BIDV as the bank did not only develop new credit products and services to meet the changing demand of the market but also implement changes in credit management model. This immediately brought about positive improvement in the financial performance of BIDV but also leverage the bank position to be the leading bank in Vietnam. Notably, the sharp growth of BIDV profit indicators was mostly captured between 2008 and 2011 as the boom of stock market stimulated demand for investment fund.

Despite capturing a higher profitability than BIDV prior to 2007, the following period saw quite poor performance in Vietinbank with ROE dropped to as low as 10% since 2014.

Figure 2.5 – Comparison of BIDV and Vietinbank CAR

(Source: BIDV and Vietinbank annual report)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 BIDV CAR 8,65% 7,85% 8,94% 9,54% 9,32% 11,07 9,65% 10,23 9,35% 9,07% 9,50% 9,34%

Vietinbank CAR 5,80% 11,62 11,20 8,60% 8,00% 10,57 10,33 13,20 10,40 10,60 10,40 10%

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Capital Adequacy Ratio

BIDV CAR Vietinbank CAR

In fact, the focus on keeping high capital adequacy reflects attempt of Vietinbank in securing better risk coverage, yet it is not sufficient to cover the shortcomings of this bank in credit risk evaluation. In a close comparison to BIDV, Vietinbank still exercise decentralized appraisal mechanism, which give too much jurisdiction to branch in granting and appraising credit (Nguyen, 2016). Consequently, a vast majority of profit has been gone to reserve or deduction for non-performing loss. According to Kagoyire and Shukla (2016), decentralized appraisal has the advantages in keeping high flexibility for banking operation as a greater frequency of assessment can be made, enabling bank to conduct more lending transaction than the counterpart. This partly explains why Vietinbank could maximize the lending volume in the boom stage of economic cycle between 2008 and 2011. This is also evident in the fact that Vietinbank maintained very high loan to deposit ratio, despite the higher underlying risk. The bank appears to follow an intensive lending strategy which deliberately pursued profit when the market demand went up. However, Vietinbank had also to assume greater risk with this approach (Nguyen, 2015). According to Le and Pham (2017), the problem with strategy of Vietinbank was revealed in the period when the hype of market was over. It was turned out that a lot of loan became non- performing after 2011; thus the profit of Vietinbank was severely affected. On the contrary, BIDV implemented a rather sustainable strategy with more careful lending operation (Nguyen, 2016). In fact, the lending strategy also granted BIDV a better performance with not only less risk but also higher profit on average. The heart of strategy implemented by BIDV was the centralized appraisal which safeguarded the bank from credit risk. In fact, the centralized appraisal has been the key factor which allows BIDV to outperform Vietinbank in profit making. Thanks to this mechanism, BIDV has successfully maintained relatively low credit risk; hence the loss from

non-performing could be minimized, contributing majorly to higher profitability. Apart from that, loan loss provision of BIDV was also significantly lower than that of Vietinbank in the period. The below figure demonstrates that BIDV needed to set fairly lower reserved amount for covering credit loss than Vietinbank in most of the period between 2008 and 2014. The situation was only better for Vietinbank when it implemented the centralized appraisal system since 2014, followed by better credit management. For this, not only loan loss provision but the non-performing loan rate of Vietinbank saw significant drop.

Figure 2.6 – Comparison of BIDV and Vietinbank NPL & LLR

(Source: BIDV and Vietinbank annual report)

By contrast to the improvement in Vietinbank, BIDV tends to experience higher non-performing loan in 2014 onward, followed by the rising loan loss provision in the later year. In 2014, BIDV non-performing loan rose significantly compared to 2013, causing the upsurge in loan loss provision to approximately in the following years to cover up the loss. The major problem for BIDV derives from ineffective market diversification which put too much

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Comparison of Vietinbank and BIDV : NPL & LLR

BIDV NPL Vietinbank NPL BIDV LLR Vietinbank LLR

pressure on the centralized appraisal system of BIDV (Nguyen, 2015). As a result, it appears that the centralized appraisal is good practice to a certain extent; yet the long term growth requires bank more sophisticated strategies and practices of credit management to improve stability in bank performance.

According to Kagoyire and Shukla (2016), the centralized appraisal provides good security to the bank in short term, especially during crisis but it somehow deters the expansion of commercial bank in the long run. Indeed, the credit performance of BIDV worked fairly well in both global and domestic crisis in 2008-2009 and 2011-2012, but it struggled to remain competitive when Vietnam economy recovered in 2013-2014. Furthermore, the diversification strategy of BIDV faced challenges when the decision making right was kept in the Headquarter. According to Nguyen (2016), the heavy reliance on the headquarter decision made BIDV fail to meet the market demand which has changed at a faster pace than it was in the past.

Additionally, the centralized authorization made the implementation of diversification in bank branches far less flexible than the competitors.

Provided that each local branch also requires different approach to customer in line with regional culture and behavior, the absence of jurisdiction in local level made it hard for BIDV to run the relevant marketing campaign tailored to specific subset of customers. For the aforementioned analysis, it is apparent that the actual performance of BIDV itself supported the findings of quantitative analysis. Accordingly, it supports that bad debt and the loss loan provision indeed played the crucial role in determining the profit making performance in BIDV, whereas the other indicators merely casted random effect on the bank. Especially, it was also confirmed that capital adequacy ratio merely secure the bank stability rather than adjust bank profitability in a direct basis. All in all, a practical solution which is necessary for BIDV to address the existing low profit performance should be developed upon solving

bad debt in the bank. Once this can be done, the profit of the bank can be assured to meet its objective. The practical measures will be discussed in detail in the later section.

Comparative review of profitability in BIDV and Vietinbank in the

Internal factors effecting the bank profitability

Other external factor effecting the bank profitability